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American Economic Journal: Applied Economics 2 (October 2010): 1–41
http://www.aeaweb.org/articles.php?doi=10.1257/app.2.4.1
Factor Immobility and Regional Impacts of Trade
Liberalization: Evidence on Poverty from India†
By Petia Topalova*
This paper uses the 1991 Indian trade liberalization to measure the
impact of trade liberalization on poverty, and to examine the mechanisms underpinning this impact. Variation in sectoral composition
across districts and liberalization intensity across production sectors
allows a difference-in-difference approach. Rural districts, in which
production sectors more exposed to liberalization were concentrated, experienced slower decline in poverty and lower consumption
growth. The impact of liberalization was most pronounced among
the least geographically mobile at the bottom of the income distribution, and in Indian states where inflexible labor laws impeded factor
reallocation across sectors. (JEL F13, I32, O15, O18, O19, O24)
T
he second half of the twentieth century witnessed one of the greatest increases
in trade openness in the history of the world. Significant declines in tariffs and
transportation costs have caused international trade to affect the economy of nearly
every country. Yet, while theory and cross-country studies suggest that trade liberalization increases overall welfare, credible evidence on how trade liberalization
affects the distribution of income within a country is relatively scant, providing
inconsistent results (see Pinelopi Koujianou Goldberg and Nina Pavcnik (2007a)
for a literature review). Even less is known about the mechanisms through which
trade effects work. These questions are particularly important in light of recent criticism of globalization from both developed and developing countries, and particularly relevant for developing countries with large vulnerable populations, inflexible
industrial structure, and inadequate social safety nets, where the long-run benefits...